I am a CPA in Texas with an MBA from the University of Chicago. I have seen a lot and made many mistakes. Hopefully by now I will have learned something from them. Just as importantly, you may learn something from my mistakes. You can e-mail me by clicking on my "View my complete profile".

Monday, October 19, 2009

Rating Agency Snake Oil-2

"As scrutiny of credit-ratings firms in Washington heats up, a second official of Moody's Corp. has emerged and is expected to testify about concerns he took to regulators earlier this year. ... Mr. [Scott] McCleskey wrote to the [SEC] in March this year, chiefly to complain that Moody's doesn't adequately monitor credit ratings it assigned to tens of thousands of municipal bonds. He also took issue with changes the company made to its compliance department last year, which preceded his departure. ... In his letter, Mr. McCleskey said that while he was head of compliance, 'virtually no surveillance was being performed' on the 'vast majority' of Moody's municipal-bond ratings. ... An SEC spokesman said the agency is 'focusing on the tips and complaints we receive and following up, where appropriate, with examinations targeting suspected problems.' ... The SEC earlier this month passed new rules, but critics still say the fundamental problems haven't been fixed", Serena NG at the WSJ, 30 September 2009, link: http://online.wsj.com/article/SB125426055962950527.html.

"A senior Moody's Corp. executive said at a congressional hearing that an outside legal firm investigating claims by a former analyst has so far found no evidence of wrongdoing. ... Richard ... Cantor told the House Committee for Oversight and Government Reform that Moody's hired law form Kramer Levin Naftalis & Frankel LLP to investigate a July complaint submitted by Eric Kolchinsky, a managing director who left Moody's in mid-September", Serena Ng and Sarah Lynch at the WSJ, 1 October 2009, link: http://online.wsj.com/article/SB125432192757352625.html.

"This morning we had hoped to be able to praise House Financial Services Chairman Barney Frank, who seemed ready to break up the credit ratings racket that did so much to inflame the financial panic. But just when you think Barney will free up competition, he reinforces the cartel. ... A former Moody's employee, Eric Kolchinsky, described a 'reckless disregard for the truth' in an August memo to a Moody's official. Yesterday he tesified that those responsible for ensuring sound ratings methodology are 'routinely bullied' by management. ... Yet despite the path of financial destruction paved by the Big Three raters, Washington still won't yank their privileged status as Nationally Recognized Statistical Ratings Organizations (NRSROs). Based on the draft reform written by Mr. Frank's colleague, Paul Kanjorski (D., Pa.), the raters can expect more compliance and legal costs, but no threat to their official role as America's judges of credit risk. ... Appearing in CNBC in September, Mr. Frank said, 'We have exalted rating agencies too much.' He added, 'We need to repeal laws that mandate the use of rating agencies.' ... The bureaucrats at the [Fed], SEC and elsewhere merely need to study the issue and report back to Congress. These are the same people who wrote the flawed rules, so why would they eliminate them? ... But by bleeding the NRSROs while leaving intact rules that require their services, Mr. Kanjorski could be creating a senario in which regulators are soon calling S&P and Moody's too big to fail. This is essentially what Sarbanes-Oxley did for the accounting firms after Enron: In the name of punishing them, make then even more important", my emphasis, Editorial at the WSJ, 1 October 2009, link: http://online.wsj.com/article/SB10001424052748704471504574441273559132330.html.

Nor will they be fixed until the individual SEC staffers incentives change.

So?

What can we expect from the geniuses who brought us Sarbox? Praise Frank, like Marc Antony did Brutus in Julius Caesar 3:2:1-34. Let us bury Sarbox. It's the product of the actions of honorable men. Just like say the AIG bailiout.

It's about time I heard someone express what Anonymous just expresssed. Just where are the hearings on the I-banks who knew the underwriting on mortgage loans was terrible and still agreed to buy this shit and sell it to investors.